With a median price-to-earnings (or “P/E”) ratio of close to 18x in the United States, you could be forgiven for feeling indifferent about Discover Financial Services’ (NYSE:DFS) P/E ratio of 18.2x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/E.
Recent times haven’t been advantageous for Discover Financial Services as its earnings have been falling quicker than most other companies. One possibility is that the P/E is moderate because investors think the company’s earnings trend will eventually fall in line with most others in the market. If you still like the company, you’d want its earnings trajectory to turn around before making any decisions. If not, then existing shareholders may be a little nervous about the viability of the share price.
Check out our latest analysis for Discover Financial Services
How Is Discover Financial Services’ Growth Trending?
There’s an inherent assumption that a company should be matching the market for P/E ratios like Discover Financial Services’ to be considered reasonable.
Taking a look back first, the company’s earnings per share growth last year wasn’t something to get excited about as it posted a disappointing decline of 62%. The last three years don’t look nice either as the company has shrunk EPS by 44% in aggregate. Therefore, it’s fair to say the earnings growth recently has been undesirable for the company.
Looking ahead now, EPS is anticipated to climb by 36% per annum during the coming three years according to the analysts following the company. With the market only predicted to deliver 13% each year, the company is positioned for a stronger earnings result.
With this information, we find it interesting that Discover Financial Services is trading at a fairly similar P/E to the market. It may be that most investors aren’t convinced the company can achieve future growth expectations.
What We Can Learn From Discover Financial Services’ P/E?
While the price-to-earnings ratio shouldn’t be the defining factor in whether you buy a stock or not, it’s quite a capable barometer of earnings expectations.
Our examination of Discover Financial Services’ analyst forecasts revealed that its superior earnings outlook isn’t contributing to its P/E as much as we would have predicted. When we see a strong earnings outlook with faster-than-market growth, we assume potential risks are what might be placing pressure on the P/E ratio. At least the risk of a price drop looks to be subdued, but investors seem to think future earnings could see some volatility.
Don’t forget that there may be other risks. For instance, we’ve identified 3 warning signs for Discover Financial Services that you should be aware of.
If you’re unsure about the strength of Discover Financial Services’ business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.
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This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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